Low yields in parts of central London suggest looming price crash
Runaway price increases could top out within 18 months in central areas such as Bond St, leaving only one way for them to go, some say
Voracious investor demand for the best London real estate is approaching record levels that could trigger a price crash in popular areas such as upmarket Bond Street, property experts say.
The luxury shopping strip that is home to Prada, Louis Vuitton and Cartier has ultra-low yields that mark it out as the most in-demand stretch of real estate in Europe.
The price of commercial property is dictated by the yield, which is the annual rent expressed as a percentage of a property's value. Yields fall as investor demand increases and push up real estate prices.
The 2.75 per cent yield on Bond Street properties should fall to 2.25 per cent by the end of the year and could hit a world-record low of 1.75 per cent in 18 months, says David Hutchings, of property consultant Cushman & Wakefield. The record was set by Taipei in 2011.
Such low yields could signal the top of the property market in central London, says Michael Marx, chief executive of British developer Development Securities.
"Those sorts of yields are breathtaking," Marx said. "The problem is that when you get to the top of Mount Everest there is only one way to go."
Rising rents would act as a brake on price falls, but they are unlikely to prevent a drop of a third or more, with the effect in London rippling out from the epicentre of Bond Street, he added.
When Bond Street yields hit 2.25 per cent they will probably be below annual returns on 10-year British government bonds, which are likely to edge up from their current 2.4 per cent as the economy recovers. And when yields on government bonds climb above 3 per cent, the gap will mean that low-yielding property investments look markedly less attractive.
Investors typically seek higher yields from property than bonds because real estate is more expensive and time-consuming to sell and also carries the risk of becoming vacant.
"Some heat will come out of the [Bond Street property] market," Hutchings said.
Global investors have spent tens of billions of pounds on London property since the financial crisis, viewing it as a safe haven amid the volatility of global equity markets and the low returns in the bond market.
The current yield on Bond Street property is below the 10-year average of 3.7 per cent and the 5 per cent yields for the best office blocks in London's financial district and in the centre of Paris.
But deals are being struck at even lower yields. "We sold an asset at a 1.9 per cent yield in Albermarle Street," said Marcus Sperber, head of real estate for BlackRock in Europe, the Middle East and Africa, referring to the strip than runs parallel to Bond Street. "Markets here could be in danger of an asset bubble."
The sentiment was echoed by Development Securities' Marx.
"The winners of the financial crisis are putting their trillions on the Monopoly board of London," he said. "It's casino time again."